Functioning of RBI- Indian Banking awareness

 Functioning of RBI- Indian Banking awareness.

Working of bank is mentioned in the 1934 Reserve Bank of India Act. Working of Reserve Bank of India can be categorised in the following group.

Development Functions

These functions are country specific functions and can change according to the requirements of that country. The RBI has been performing as a promoter of the financial system, since its inception.

Some of the major development functions of the RBI are mentioned below,.

Development of Agriculture Right from.

the beginning, Reserve Bank of India has an Agricultural Credit Department. The principal function of this department is to conduct research regarding various problems of agricultural credit.

Promotion of Industrial Finance 

Rapid industrial growth require's adequate and timely availability of credit to small, medium and large industry. For this, RBI has been instrumental in setting up special financial institutions such as ICICI, IDBI, SIDBI and Exim Bank etc. Reserve Bank provides significant financial assistance for the industrial development of the country.

Promotion of Export Through Refinance

RBI tries to encourage the facilities for providing finance for foreign trade especially exports from India. The Export-Import Bank of India (Exim Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purposes.

Development of Bill Market Reserve

Bank has made concerted efforts for the development of bill market. In this regard, it initiated its first plan in 1952. This plan was made applicable for all the scheduled banks from 1954 onwards. In 1958, export bills also came within the purview of this plan. In 1970, Reserve Bank started New Bill Market Programme. As a result of development of the bill market, it can be possible to make the monetary policy more successful.

Development and Regulation of Banking Systenm. 

Because of the notable efforts of Reserve Hank that banking system in India has assumed the status of development banking. Also, there has been a notable spread of branch banking in rural areas. Appropriate credit facilities have been arranged for the priority sectors. In order to regulate the functions of the banks, in 1993, Board of financial Supervision was set-up. Since 1994, banks in the private sector have been issued licences.

Traditional Functions

These are those functions which every Central Bank of nation performs all over the world. These functions are in line with the objective with which the bank is set-up. It includes fundamental functions of Central Bank.

General Banking Functions

Reserve Bank is not a Commercial Bank. Yet, being the Central Bank, it performs certain general banking functions as well. These functions are as follows

To Accept Deposits : The bank accepts deposits of the Central Government, State Governments and port-trust without paying any interest.

To Deal in Bills : Reserve Bank buys, sells and rediscounts the bills, promissory notes and hundies. However, these bills should not be of duration exceeding 90 days and should be payable within the country.

Lending of Money : As a Central Bank, the Reserve Bank of India gives loans to the Central and State Governments. These loans are of duration of not more than 90 days. The loans are given against securities, credit notes of the banks and gold or silver.

To Deal in Agricultural Bills : Reserve Bank also buys, sells and discounts agricultural bills. These bills should be payable in India and should not be of duration exceeding 15 months. 

To Deal in Foreign Securities : The RBI deals in all such foreign securities which are encashable within 10 years from the date of purchase.

 Taking of Loans Reserve Bank can borrow loan on the security of assets from scheduled.

To Deal in Costly Metals : Reserve Bank deals in the sale and purchase of gold, silver as well as the coins of these metals.

To Deal with the Banks of Other Countries : Being a member of IMF, Reserve Bank establishes business relations with the Central Banks of other member countries. It can open accounts with those banks and may act as their agent or handle IMF dealings.

Central Banking Functions : Reserve Bank is the Central Bank of India Central banking functions are as under

Issue of Paper Currency :

          The Reserve Bank is one nation's sole note    issuing authority. It issues notes of the denomination of 2, 5, 10, 20, 50, 100, 500 and 1000. The bank has al separate department for note issuing. This is known as Issue Department. In accordance with the Reserve Bank of India Act, RBI Bank is required to maintain Reserve fund for note issuing.

The Indian Currency System : The present monetary system of India is based on in convertible paper currency and is managed by the Reserve Bank of India. The present currency system is based on minimum reserve system, of note issue. It was adopted in 1957 under the minimum reserve system, minimum of gold and foreign securities to the extent of 200 crore (of which gold should be of value 115 crore) and the balance in rupee (2) securities maintained.

New Symbol of Indian Currency

The new symbol designed by D Udaya Kumar, a post graduate of IIT Bombay was finally selected by the Union Cabinet on 15th July, 2010. The new symbol, is an amalgamation of Devanagri 'Ra' and the Roman 'R' without the stem.

The symbol of Indian rupee came into use on 15th July, 2010. India is the fifth country (after America, Britain, Japan and Europe) to accept a unique currency symbol.

banker of the government

 the RBI has to work as an agent of the central and state governments. it performs various banking unctions such as to accept deposits, taxes and make payments on behalf of the government. it works as a representative of the government even at the international level. it maintains government accounts, provides financial advice to the government. it provides overdraft facility to the government in case of financial crunch

banker of banks and lender of the last resort 

RBI acts as a banker for all the commercial banks. all scheduled banks come under the direct control of rbi. all commercial as well as schedule banks have to keep a minimum reserve with the rbi. they have to submit weekly reports to rbi about their transactions. by performing 3 functions, the rbi helps the member banks significantly.

they are given bel

•  it acts as the lender of the last resor
• it is the custodian of cash reserves commercial bank
• it clears, transfers the transaction. it acts as the central clearing hous.

minimum reserve system (MRS)

the asset of the issue department were to consist of not less than 40 crore in value. remaining 3/5th of asset might be rupee coins. this was call

proportional reserve system the system changed in 1965. since than rbi is required to maintain a gold and foreign exchange reserve of 200 crore of which at least 115 crore should be in gold. this is called minimum reserve system.

Regulatory function

control of credit is the principal function of the reserve bank of india. control of credit means expansion or contraction of credit. the key aim of the monetary regulation is to achieve the objective of growth with stability. reserve bank of india makes use of all those methods of credit control that are adopted by other central banks in the world.nsm.m.eds)e.heofs.t.owy.h. Central Banks in the world. The methods adopted by the Reserve Bank to control credit are studied under two parts

Quantitative Credit Control

To control the flow of quantum of credit, Reserve Bank adopts all those measures that are generally adopted by the Central Banks in different

countries. These measures are as under

Bank Rate Rate of

interest that the Reserve Bank charges from other scheduled banks on the loans given to them is called bank rate. Policy of bank rate has not been used as a weapon to check price rise.

Differential Rates of Interest 

In October, 1960 the Reserve Bank started differential rates of interest programme. According to this programme, if any bank borrows from the Reserve Bank beyond the quota fixed for it, it has to pay higher interest rate than the prevailing bank rate..

Open Market Operations

It mean that the bank controls the flow of credit through the sale and purchase of government securities in the open market.

Cash Reserve Ratio : (CRR) It is the amount of funds that the banks have to keep with RBI. If RBI decides to increase this rate the available amount with the banks comes down. RBI uses this method (increase of CRR rate), to drain out the excessive money from the banks.

Statutory Liquidity Ratio : (SLR) It is the ratio of liquid asset, which all Commercial Banks have to keep in the form of cash, gold and unencumbered approved securities equal to not more than 40% of their total demand and time deposits liabilities.

Direct Action 

According to the 1949 Act, Reserve. Bank can stop any Commercial Bank from any type of transaction'. In case of defiance of the orders of Reserve Bank, it can resort to direct action against the member bank. It can stop giving loans and even recommend the closure of the member bank under pressing circumstances.

Credit Authorisation Scheme : In 1965. Credit Authorisation Scheme was adopted. It aims at regularising of the credit given by the banks. Before sanctioning a credit limit of 2 crore or more to any one debtor, every bank will have to get authorisation from the Reserve Bank. Even after the authorisation the creditor bank can inspect the account books of the debtor to ascertain the use of the credit.

Liquidity Adjustment Facility : (LAF) It is the primary instrument of Reserve Bank of India for modulating liquidity and transmitting interest. rate signals to the market. Liquidity Adjustment Facility was introduced for the first time for June, 2000 onwards. Subsequent revisions were made in 2001 and 2004.

Tit-Bits

• RBI continued to serve as the Central Bank to Burma (Myanmar), until Japanese occupation of Myanmar in April, 1947.
• RBI continued to serve as Central Bank to Pakistan, until June, 1948. 
• Repo rate and reverse rapo rate are the parts of Liquidity Adjustment Facility (LAF) of RBI.
•  The reverse rapo rate will be kept 100 basis points. Lower than the rapo rate, on the other hand, Marginal standing Facility (MSF) will be kept 100 basis points. higher than the repo rate.

RBI Controls, Inflation and Growth

RBI can influence inflation and growth in the economy to a large extent through its instruments of control. It is RBI squeezes out liquidity from the economy by selling securites, increasing repo rates, increasing CRR etc. then the demand in the economy is reduced and inflation is brought under control.

However, in case inflation is due to supply side shortages, RBI controls have less influence. Similarly, increasing liquidty in economy means that households have more money to consume, Industries have more money to invest in plant and machinery etc all of which lead to increase in economic activity.

Qualitative or Selective Credit Control

This refers to the control of specific credit meant for certain specific objectives. e.g., if the government wants to check the rising prices of wheat in India, the Reserve Bank may instruct the member banks not to give loans against the security of wheat. Traders will not get credit for the purchase of wheat and therefore, they will not be able to buy large quantities of wheat. This would bring down wheat prices as the credit squeeze is directed towards wheat alone. It is thus called selective control.

Change in Margin Requirements on Loans 

ReserveBank directs the member banks to change their margin requirement from time to time. First such direction was given by the Reserve Bank in May and September, 1956 regardingrice-trade.

Maximum Limit of the Loans 

With a view to checking speculation Reserve Bank has fixed maximum limits of loans by the Commercial Banks. No scheduled bank is allowed to grant, loan exceeding 1 crore to any single party without the prior permission of Reserve Bank of India, according to its 20th November, 1965 Credit Policy. This restriction has since been withdrawn.

Rationing of Credit 

It is yet another technique of selective credit control. Under this programme, the Reserve Bank fixed credit quota for member banks as well as their limits for the payment of bills. Quota system was introduced in 1960.

Moral Persuasion

From time to time Reserve Bank holds meetings with the member banks seek their. co-operation in effectively controlling the monetary system of the country. It advises against the expansion of credit, except to priority sector i.e., agriculture, small industries etc.

Other Functions Besides the above stated specific functions, the Reserve Bank of India performs the following other functions.

 Export Assistance Reserve Bank gives loans to the export industries. These loans are given indirectly by refinancing the loans given by Export import Bank and other banks.

Clearing House Functions Being Central Bank of the country, the Reserve Bank also functions as clearing house. Inter-banking obligations are conveniently settled through this house

Change of Currency The bank changes big notes into small ones and small notes into coins.

 Transferof Currency The bank also facilitates the transfer of currency. It also ues demand Hundies on its branches.

Foreign Exchange Management

It is an essential function of the RBI. Being the Central Bank of the Country, Reserve Bank of India also regulates exchange rate of rupee in terms of foreign currencies. It tries to maintain stability of exchange rate. In order to maintain the exchange rate stability, it has to bring demand and supply of the foreign currency close to each other. Reserve Bank deals with the currencies of only those countries which are members of IMF.

Limitations on RBI

It has certain limitations as the RBI cannot functions as the commercial banks, cannot give loans against the fixed asserts. RBI cannot give unsecured loans to others.

Capital Adequacy Ratio (CAR)

 Percentage ratio of a financial institution's primary capital to its assets (loans and investment), used as  measure of its financial strength and stability.

Tier 1 and Tier 2 Capital 

These are as follows

Tier 1 Capital is the core measure of bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings), but may also include non-redeemable non- cumulative preferred stock.

Tier 2 Capital or supplementary capital, include a number of important and legitimate constituents of a bank's capital base.

Important Rates Determined by RBI

 Bank Rate : It is also called the rediscount rate. It is the rate at which the RBI allows finance to commercial banks. Currently it is at 9%.

Repo Rate : It was introduced in December, 1992 by RBI. It is the rate at which RBI lends short-term money to the banks against securities. It is currently at 8%

Reserve Repo Rate : It was introduced in November, 1996. It is the rate at which banks park short-term excess liquidity with on RBI. It is currently at 7%.

Cash Reserve Ratio It is the amount of funds that banks have to keep with RBL. If RBI increases CRR, the available amount with banks comes down, RBI uses ito to drain out excessive money from the banks.

Statutory Liquidity Ratio It is the amount which a commercial bank is required to maintain in the form of cash or gold or government approved securities (bonds) before providing credit to its customers. SLR is used to control inflation and promote growth.

Marginal Standing Facility It is the rate at which scheduled banks could borrow funds overnight from RBI. In MSF, banks can use the securities under 'SLR' to get loans from RBI. MSF rate is 1% higher than repo rate.

Conclusion.

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